2 Gold Stocks to Profit From for Cheap (JNUG GDX)

I can trade gold stocks via the exchange-traded fund Market Vectors Gold Miners ETF (NYSEARCA:GDX). Luckily, it carries options like a regular stock. And if that’s not enough, another ETF in the same vein is Direxion Daily Junior Gold Miners Index Bull 3x Shares (NYSEARCA:JNUG).

JNUG
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The difference between the two is that the JNUG is a 3x leveraged miners ETF. It provides triple the returns of the GDX. So, if its related fund, Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) loses 1%, JNUG should theoretically lose 3%.

On this up day, I have to take into account the risk that is now baked in the gold stocks. The SPDR Gold Trust (ETF) (NYSEARCA:GLD) recently broke down from the $125-per-share level, which had been support. This was technically predictable; $122 per share was in the cards, yet it slightly overshot that number.

GLD
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Now GLD is trying to address the range as potential resistance, meaning that this rally may face some downside pressure soon.

Gold tends to be a fear trade — traders flock to buying GLD for protection against an event. We saw this unfold recently on election fears.

We could see it repeat, perhaps by the long-anticipated December rate hike.

Trades for Gold Stocks JNUG and GDX

Trade No. 1 — The Bet: Buy the JNUG Dec 23 $13 call for $2.25 per contract or better. To be completely successful, I only need JNUG to rally from current levels by mid-December.

To hedge my out-of-pocket risk I will add another side to this trade. Just note that premiums are jumping around, so I’d bid lower than the middle, then walk it higher until it fills.

GDX
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Trade No. 2 — The Bank: Sell the GDX Nov $22/$21 credit put spread for 16 cents per contract or better.

To be successful, I need GDX to stay above my sold spread through its expiration in mid-December. The 12% buffer is smaller than ideal, with only 80% theoretical chance of success. But it looks like the bulls defended the $22 per share level well recently.

If I take both trades, I can be long gold miners for free. While I would need a rally in JNUG past my bought call to really profit, I would still have the chance of profit even if JNUG stalls here. Any premium I collect from selling the JNUG call would be profit since I financed them with the GDX trade. The assumption here is that GDX holds higher than my credit put spread sold.

I am not required to hold either trade through expiration. I can close either for partial gains or losses.

Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and StockTwits at @racernic.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/11/gold-stocks-jnug-gdx/.

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